Cisco margins take haircut from reseller rebates!

By Brad Reese on Thu, 02/19/09 - 12:01am.

In its most recent Form 10-Q filing (page 36) with the U.S. Securities and Exchange Commission, Cisco fretted:

"In the second quarter and the first six months of fiscal 2009, our gross margin percentage decreased compared with the corresponding periods of fiscal 2008.

"The decrease was driven by lower product gross margin, which was due to higher sales discounts and rebates."

What's the identity of one of the culprits?

Well, one of the culprits according to a report in ChannelWeb, happens to be none other then rebates to Cisco resellers as incentives for motivating customers into switching out gear in the network core, which are currently stuffed to the gills with $20 billion of both aging and obsolete Cisco gear as well as $40 billion in Cisco gear that has been in use for more than five years.

Under the Cisco reseller core acceleration program, Cisco resellers that perform a network assessment for their customers can receive $1,000 in rebates per assessment. "The core is the foundation. We and our partners need to help their customers realize the opportunity so they can prepare for the future," said Wendy Bahr - Cisco Senior Vice President for US and Canada Channels.

Cisco F2Q09 results (page 43) show that Cisco router sales year over year (YOY) declined by $444 million (-22.6%). Furthermore, Cisco switch sales year over year (YOY) also declined, but only by $361 million (-10.7%).

Seeking to place a tourniquet on its bleeding, Cisco is offering resellers 5% rebates on router sales as well as 10% rebates on switch sales.

"The difficult part of an economic storm is you never know how long it's going to last," said Edison Peres - Cisco Senior Vice President for Worldwide Channels Go-to-Market.

Pushing the pedal to the metal, Cisco Capital is also offering stackable financing options for Cisco resellers to sell; Now's the Time (Cisco will finance up to $30 million per client) and UC Deployment (Cisco will finance up to $10 million per client).

"Solution providers are technical guys; they want to talk about the speeds and feeds. But if they don’t change the way they’re selling, they won’t get deals. Our mission is to ensure that the customer remains current with the latest technology. A bank’s mission is entirely different," said Maryann Von Seggern - Cisco Capital Director of Worldwide Channels.

In my younger years (true story), yours truly was the manager of a restaurant in New York City, the old Charley O's located at Madison Square Garden (it has since moved to a new location). During hockey and basketball games as well as many other events it was a total zoo!

From battle scarred experience I learned that in order to maximize revenue during Madison Square Garden Events you could not be successful by implementing Plan A, Plan B or even Plan C.

Why?

Because business was just too extreme (packed elbow to elbow) during Garden events.

Nope, you had to get just as crazy as your customers and go to that extreme outermost Plan Z!

Even though Cisco is obviously stuck between a rock-and-a-hard place (just like its customers), in my opinion Cisco isn't being crazy enough (i.e. aggressive) with its reseller rebates and financing, it's almost as if Cisco somehow is believing itself above the fray.

With Cisco's blood flowing south in -22.6% torrents, is Cisco being way too stingy with its reseller rebates?

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